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Essay / Research Paper Abstract
This 11 page paper looks at the way in which speculation may increase or decrease volatility of an exchange rate and assesses the models that have been developed to try and explain exchange rate movements. The paper ends by looking at the role and strategies that are used when hedging. The bibliography cites 9 sources.
Page Count:
11 pages (~225 words per page)
File: TS14_TEspecexc.rtf
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Unformatted sample text from the term paper:
be explained by underlying influences that are seen, with the exchange rate responding to the speculation, creating a self fulfilling prophecy. There is some evidence that this occur with nothing
more than speculation driving or influencing a market, Jeanne (1997) has shown this to be the case with the 1992/3 French Franc crisis. However, the converse is also true, it
is argued that while speculation may increase volatility and destabilise a currency, it is also possible that it will have the opposite effect stabilising it at a time when the
evidence indicate there should be greater volatility, but the speculators believe that it is ether temporary or should not be having the same impact, this is also potentially a self
fulfilling prophecy. Where there is speculation against a currency there creation of economic conditions that will have a material impact on the currency, increasing the potential for a fall
or devaluation. The market is driven by the traders and if sufficient numbers believe that there will be a particular movement, they can cause that movement as a result of
their trades. It is this accumulative effect that influences the trade and with human nature not always taking the logical path when making decision it is possible that the underlying
macro and political influences may be reacted to in a manner that is out of equilibrium. Issues such as comfort and confidence are apparent in the way the traders make
the decisions, which theoretically can also help a currency weather the storms, if there is confidence in the way the underlying economic influences are being managed. There are a
number of models or theories that have been developed in order to explain the way that exchange rates are linked to other factors, such as interest rates and inflation. By
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